Increase in the weight of capital targeting real estate

2012-02-22T06:00:00Z

Jones Lang LaSalle report says Australia is receiving a disproportionate share of global capital, with offshore investors increasing their allocations to real estate and showing no signs of reducing their interest in Australia

AUSTRALIA, 22 FEBRUARY 2012 – Jones Lang LaSalle analysis shows that sovereign wealth funds and global pension funds are re-rating property and increasing their allocations to real estate and the Asia Pacific region. Australia is receiving a disproportionate share of this global investment.

The Office Investment Market Review and Outlook 2012 says offshore investors continue to be the price-setters in Australia’s commercial property markets and accounted for 28% of total office transactions in 2011. Nine of the 20 assets that transacted over $100 million were to offshore investors.

Managing Director, Investments and Advisory, John Talbot said, “A number of sovereign wealth funds and global pension funds are re-rating property, resulting in higher allocations to direct property within their portfolio. A higher allocation to the asset class is increasing the volume of global capital targeting real estate.

“Australia is viewed as a highly transparent and low beta destination in the Asia Pacific region and is benefitting both from the increased allocation to the asset class and increased allocation to the Asia Pacific region,” said Mr Talbot.

The Report says from March 2010, the Government Pension Fund (Norway) allowed for a maximum 5% allocation to real estate (previously zero). The Canadian Pension Plan Investment Board (CPPIB) – who have been active in the Australian retail and industrial sectors – has also increased their allocation to real estate from 4.3% in 2007 to 9.1% as at September 2011. A number of other funds, including the NPS and CIC, have also increased their allocation to alternative investments (including real estate).

Outlook for the depth of the investment market in 2012 and key buyer groups:

“As a result of the increase in weight of capital targeting real estate, there will be an even deeper buyer pool for trophy assets in 2012. Offshore groups will remain active, domestic wholesale funds will be looking to deploy capital into the market, domestic superannuation funds will remain active and private investors and boutique fund managers will continue to seek out counter cyclical opportunities,“ said Mr Talbot.

“Over the past five years, we have seen a number of new entrants into Australia’s commercial property market. There were further new entrants in 2011.

“Pramerica Real Estate Investors acquired two assets – 595 Collins Street, Melbourne and 40 Mount Street, North Sydney – for their Asia Real Estate Fund. Pembroke Real Estate – a Boston-based fund manager – made their first investment in the Asia Pacific region, excluding Japan, with the acquisition of 20 Martin Place, Sydney. The HNA Group – a Chinese conglomerate – also entered the Australian market with the purchase of 1 York Street, Sydney.

“There are currently a number of offshore groups – without an exposure to Australia – preparing strategy papers for investment committees to obtain an allocation for investment into the Australian market,” said Mr Talbot.

While offshore investors were the price-setters in 2011, there will be greater competition for assets in 2012.

Mr Talbot said, “Offshore groups have been the dominant purchaser of prime-grade assets in excess of AUD 100 million. However, a number of domestic wholesale funds successfully undertook capital raisings in 2011 and they will be looking to deploy this capital into the market in 2012.

“Domestic superannuation funds were also active investors. In 2011, their allocation to direct property increased from 4.9% of total asset base in early 2007 to 7.0% of total asset base in late 2011.”

The Report says against a backdrop of global volatility in 2011, the performance of the office sector in 2011 was all the more impressive.

Jones Lang LaSalle’s Head of Capital Markets Research for Australia, Andrew Ballantyne said, “Australia’s reputation as a highly transparent market that offers solid returns with low volatility is ensuring we receive a disproportionate share of the global capital targeting real estate.

“The Jones Lang LaSalle total return index for the five main CBD office markets and Canberra delivered a result of 11.2% in 2011.

“The global hunt for yield makes Australian assets appear very attractive relative to the mature office markets of North America and Western Europe. For example, the average yield for prime-grade office property in New York (4.30%, London (4.00%), Frankfurt (4.80%) and Tokyo (3.60%) are significantly lower than Sydney (6.88%), Melbourne (7.13%) and Brisbane (7.50%),” said Mr Ballantyne.

The main findings of the Office Investment Market Review of 2011 include:

• Vendors: A-REITs were one of the most active vendors – accounting for 28.6% of office transactions by value. Unlisted funds were also active vendors in 2011. In total, they accounted for 29.3% of transactions by value. Property companies/developers were the vendor in 21.1% of the transactions by value. Private companies and investors were active on both sides of the ledger, but were the vendor in 8.4% of the transactions by value.

• Purchasers: Offshore investors had a large appetite for prime-grade office assets in 2011. Australia has received a disproportionate share of cross-border capital since 2007. There was increased investment activity from domestic institutions. A number of wholesale funds were successful in raising capital and a proportion of that capital has already been deployed. Private companies and investors accounted for 16.4% of the transactions by value in 2011. Private investors are the price-setters in non-CBD office markets.

• Rental Outlook: The combination of positive net absorption, declining options for prime contiguous space and a moderate supply outlook formed the backdrop for above trend rental growth in 2011. The markets that led the office market recovery in 2010 – Melbourne and Adelaide – recorded lower rental growth in 2011, while the laggards of Perth and Sydney became the market leaders as incentives were wound back and face rents moved higher. Jones Lang LaSalle Research forecast a three-year period of above-trend rental growth between 2011 and 2014.

• Capital values Outlook: The Jones Lang LaSalle Capital Value Indicator (CVI), which tracks prime-grade office values, increased by 6.9% in 2011 and has now risen by 12.3% since the cyclical low was recorded in values (Fourth quarter, 2009). Capital values are projected to rise by an average of 4.2% per annum between 2011 and 2014. Over the forecast period, Perth (6.1% per annum), Sydney (5.6% per annum) and Brisbane (5.2% per annum) are forecast to record above-trend capital value growth over the next three years.

• Investment Outlook for 2012: The investment market will remain volatile in 2012. However, the fundamentals of most Australian office markets remain relatively firm. There will be opportunities to acquire assets and through active management strategies, achieve returns above historical benchmarks in 2012.

• Economic Outlook for 2012: The Report says although global economic growth projections have been revised down, Australia is more intrinsically linked to the outlook for emerging Asia. Australia is in the middle lane of the global multi-speed economy and is better placed than most advanced economies to face the economic headwinds of 2012. Queensland and Western Australia are in the fast lane of the multi-speed domestic economy with growth projected at 7.1% and 5.3% in 2012. New South Wales (2.4%), Victoria (2.1%) and South Australia (2.8%) are projected to record lower growth in 2012 and lag behind the resource-dependent states over the next three years.